What does the Covid-19 pandemic have to do with Capital Gains Tax?

What does the Covid-19 pandemic have to do with Capital Gains Tax?

The coronavirus pandemic has had an unprecedented impact on public sector finances and will continue to do so for many years to come. Increasing Capital Gains Tax is one option available to the Chancellor of the Exchequer to help him balance the books at a time when government debt is spiralling out of control.

Apart from the human cost in terms of loss of life and suffering, the monetary costs of the pandemic arise from the introduction of public health measures to fight the disease and also from new government policies to support businesses and individuals, such as the Furlough scheme, the Job Retention scheme and the “Eat out to help Out” scheme. These costs have been truly mind–boggling with annual borrowing heading towards £400 Billion this year and national debt of more than £2 Trillion.

The national debt is growing by £5,170 per second so this figure will be hopelessly out of date by the time you read this article.

As the pandemic retreats, the Chancellor will have to take an axe to annual borrowing and find ways of tackling the national debt which, to put it into perspective, amounts to approximately £32,000 for every person in the country. Or to put it another way, if as a country we decide to pay off our national debt each man, woman and child in the country would have to stump up £32,000.

The truth however is much worse; factoring in all liabilities including state and public sector pensions, the real national debt is closer to £4.8 trillion, some £78,000 for every person in the UK.

A proposal to impose huge tax increases on the capital gains made by business owners and ordinary middle-income citizens is now under review by the Treasury and is the first indication of the pain that lies ahead as the nation tries to balance the public finances.

The Office for Tax Simplification (OTS) has recommended taxing UKs wealthier individuals by reforming the capital gains tax regime, which falls on profits made from selling stocks and shares, second homes, land or profitable businesses. The OTS recommends that capital gains should be taxed at the same rate as income, which would mean swingeing increases.

Not only could the rate of capital gains tax increase substantially but tax-free allowances are likely to be hit hard too. At the moment savers who opt to sell some of their investments, for instance to help fund lifestyle and/or gifts to children and grandchildren, can make a gain of £12,300 each and every tax year before having to pay capital gains tax. This tax-free allowance is likely to be reduced to £5,000 or perhaps even as low as £1,000.

Another insidious proposal involves levelling off the rates of income tax and capital gains tax. At the moment capital gains tax operates on a sliding scale, with basic rate tax payers paying CGT of 10% on gains over the annual allowance of £12,300 (18% if these gains arise from a property sale) and higher and additional rate tax payers pay CGT of 20% on gains over the annual allowance of £12,300 (28% if these gains arise from a property sale). It is therefore clear that any attempt by the Treasury to level these tax rates would result in tax payable on capital gains at least doubling. The OTS claims that the current disparity also provides an incentive for business owners to pay themselves relatively modest salaries and take advantage of the lower capital gains taxes when selling all or part of their enterprises.

The Institute of Fiscal Studies believes that tax receipts may have to rise by as much as £40 billion a year if progress is to be made into cutting the national debt. The Treasury Advisers who have come up with the tax raid proposals argue that levelling up the gap between income tax and capital gains rates could raise as much as £14 billion a year which goes some way towards filling the black hole in public finances.

Of course, the Chancellor of the Exchequer will want to tread a fine line between raising taxes and choking off the economic recovery when it arrives. Some will argue that increasing the burden of capital gains taxes on enterprises, savers and second property owners can only destroy the economy’s dynamism, living standards and job creation BUT the writing is on the wall. Eventually the Exchequer will need to raise taxes to help balance the public finances and levelling up capital gains tax and income tax rates and allowances is likely to be one solution the Chancellor will find hard to resist.

So, what can we do about this real threat of a rise in capital gains tax?

Review your current investment holdings to ensure that assets are held within tax favoured investment wrappers such as ISAs, pensions, or investment bonds where possible.

Consider crystallising gains now while rates are still relatively low and generous allowances are still available. Biting the tax bullet but using the planning opportunities available to redistribute assets with greater tax efficiency and for those with greater appetites for risk, investment via Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT) could also offer the opportunity to benefit from additional tax reliefs.

There are several legitimate tax planning opportunities available and a full review of your investment portfolio is an excellent starting point.

A robust lifelong financial plan can help to ensure the investment strategy you deploy will be effective and due consideration is given to the anticipated time horizon for your investments.

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John Winstanley
Financial Planner